Unions Are Dead? Why Competition Is Paying Off For America's Best Workers

This story appears in the December 26, 2017 issue of Forbes.
Subscribe

By Maggie McGrath, with Lauren Gensler and Samantha Sharf

Almost two years ago,
Intel CEO Brian Krzanich made the kind of headlines no company wants: In the process of restructuring the storied chipmaker, he was eliminating 11% of its workforce -- 12,000 jobs. But far more quietly, Krzanich was focusing on something seemingly contradictory: cranking up a program to prevent the workers the company wanted to keep from walking out the door.

The retention initiative was launched as part of a diversity push. In 2015, Krzanich had pledged some $60 million a year to boost underrepresented groups at Intel, yet in that year the company treaded water: 584 African-Americans, Hispanics and Native Americans were hired, and 580 from those groups departed. Ed Zabasajja, a Ugandan-born, Auburn University-trained engineer who oversees internal diversity analytics, was keen to acquire data to figure out why employees left -- before they did.

Thus was born WarmLine, whose touchy-feely name hasn't prevented more than 10,000 workers from reaching out. More than just a data-collection operation, WarmLine quickly developed into a way to address problems such as finding colleagues for isolated workers to bond with, mediating management disputes, arranging transfers and even asking for raises. And it also became an outlet for the entire company--roughly half of WarmLine's users have been white and Asian men.

"There's a limited number of people who can do many of these technologies," Krzanich says. His product, ultimately, relies on talent.

(Photo credit: Ethan Pines for Forbes)

Zillow, the online real estate marketplace, has gone even further to keep its key employees. CEO Spencer Rascoff sees recruitment and retention as the company's leading priority and has a new "internal mobility" team focused on top performers. After one star recently decided during a six-week paid sabbatical (yep, Zillow grants one every six years) that he needed to leave and pursue a big change, Zillow kept in touch. Within two months, the defector was back in a new role. "It's much more economical to just keep people motivated and engaged over a long period of time rather than churning and burning people," Rascoff says.

Conventional wisdom holds that employees have less power than they've had in decades, with a growing share of jobs vulnerable to automation or offshoring and just 6.4% of U.S. private-sector workers in unions. Exhibit A is the recovery from the Great Recession: As corporate profits set new records, median wages barely budged until last year. That anxiety is reflected in the Just 100, the first-ever ranking of companies based on what Americans expect of a good corporate citizen. Some 80% of the 72,000 Americans surveyed over the past three years by Just Capital say companies aren't sharing enough of their success with employees. Asked to cite what a company's top priority should be, 33% said workers or jobs, compared with just 6% who said shareholders or management.

But a free labor market can cut both ways. With unemployment now scraping 4%, and traditional rewards of long tenure (pensions and protection from layoffs) just a memory, employees have little reason to be loyal. The "quit rate" for 2017 is on track to be the highest in over a decade, with 26% of workers voluntarily waving goodbye. So companies that fare well on the Just 100 list are attempting to rebuild workers' loyalty, 21st-century-style: not with no-layoff guarantees but with fair pay, bonuses, stock options, new benefits (think paid family leave, sabbaticals and student-loan repayments) and programs designed to fulfill Millennial demands for work-life balance, inclusive workplaces and professional growth. Competition is the new union. "Transparency combined with a tight labor market is effectively working as an advocate for employee betterment," says Andrew Chamberlain, the chief economist at Glassdoor.

No, we're not trying to sugarcoat reality. The new benefits are far more likely to be lavished on in-demand, highly skilled workers, and there are still too many terrible jobs and employers in America. But there's an aspect to this phenomenon that might surprise some less enlightened CEOs and investors: Treating workers right ultimately benefits shareholders after all, and not only in tight labor markets. The companies of the Just 100 have returned three percentage points a year more than the S&P 500 over the last five years. (For a full explanation of the Just 100's methodology, see this link here.)

Ethan Pines for Forbes

Zillow CEO Spencer Rascoff. Zillow ranked #51 in the 2018 Just 100.

So does great performance allow companies to treat workers better, or does worker treatment drive great performance? While there's some measure of both at work, the latter seems to be the main dynamic. In 2012, Alex Edmans, a finance professor at Penn's Wharton School who is now at the London Business School, analyzed 27 years of stock market returns for U.S. companies chosen as top places to work. They outperformed the market by 2.3 to 3.8 points per year for the entire stretch, no matter the broader economic conditions. More recently, he studied the relationship between employee satisfaction and stock returns across 14 countries. In rigid labor markets, such as Germany's, where regulations or union contracts provide a floor of benefits and limit management flexibility, spending extra on workers provides little in the way of return. But in flexible labor markets, such as in the U.S. and the U.K., treating workers better consistently produced higher returns.

The Just 100 get that, even if Wall Street doesn't. Stock analysts "look at things like layoffs and they look at the cost. They don't think about the employees' long-term morale," says Krzanich, of Intel, which claimed the No. 1 spot this year on the Just 100. "I've never been asked, 'How do you treat employees?' " Mark Costa, the CEO of
Eastman Chemical, which ranks seventh on our list in terms of employee treatment, concurs: "Investors just want more dollars. I don't think they spend a lot of time thinking about the consequences to the worker." Ironically, if they did, more dollars would often follow.

The idea of treating workers well isn't new -- just erratic. In 1875,
American Express became the first private employer to provide a retirement plan. By the early 1900s, when employee turnover often exceeded 100% a year, visionary businessmen were experimenting with new ways to attract and keep workers. Henry Ford introduced $5-a-day pay; Milton
Hershey and George Pullman built towns and housing for their workers; a company called Norton Grinding pioneered paid vacations. The Great Depression halted, at least temporarily, this brand of welfare-minded capitalism.

But then the government and unions stepped in. The National Labor Relations Act of 1935 guaranteed workers the right to organize and strike, and labor-union growth continued for the next three decades. Private pensions continued to grow during this time too--thanks in large part to the new labor unions. The unions' decline began in the 1960s, when the Supreme Court issued a string of pro-employer rulings, holding, for example, that companies weren't obligated to bargain over decisions "at the core of entrepreneurial control." Reforms to the National Labor Relations Board under the Nixon Administration and anti-union Supreme Court decisions and executive actions during the Reagan years further weakened the union movement. In 1983, 16.8% of all private-sector workers were in a union, two and a half times the rate of today.

Wall Street also played a role during this period. The Reagan era coincided with the Milken era, when leveraged buyouts were built around finding efficiencies, even if that meant treating company assets like Tinker Toys and workers as costs rather than assets. Barbarians at the Gate was a bestseller, the Predators' Ball was the marquee event and the iconic 1987 movie Wall Street depicted workers as pawns of Armani-clad paper pushers. At the same time, companies began shifting from "defined benefit" retirement plans -- a lifetime pension, with benefits backloaded to reward longer-tenured workers--to cheaper "defined contribution" plans. While this brought some sanity to corporate balance sheets, it also liberated workers to walk out the door with their retirement stash and roll it into an IRA or a new employer's plan.